Two days after the IRS released their updated and highly anticipated new cryptocurrency tax guidance in October of 2019, the agency circulated a draft of the new 1040 Schedule 1 for the upcoming 2019 tax season. On this new tax form, which will be filled out by all taxpayers in one way or another (aprox. 150 million), there is a check “yes” or “no” question at the very top:
“At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
This is a very big deal. Under penalty of perjury, 150 million taxpayers will now have to declare whether they transacted with virtual currencies like bitcoin.
Disclaimer - This post is for informational purposes only and should not be construed as tax or investment advice. Please speak to your own tax expert, CPA or tax attorney on how you should treat taxation of digital currencies.
Cryptocurrencies like bitcoin themselves are not taxed outright. In other words, simply owning bitcoin doesn’t create a tax liability. Rather, it’s the gains and losses that you incur when buying, selling, and trading cryptocurrencies that create capital gains and losses which ultimately need to be reported on your tax return.
Here’s how it works: The IRS treats cryptocurrencies as property for tax purposes, not as currency. Just like other forms of property then—stocks, bonds, real estate—you incur a tax reporting liability when you sell, trade, or otherwise dispose of your cryptocurrency for more or less than you acquired it for.
In this sense, cryptocurrency trading looks similar to trading stocks for tax purposes.
For example, if you purchased 0.2 Bitcoin for $2,000 in April of 2019 and then sold it two months later for $4,000, you have a $2,000 capital gain. You report this gain on your tax return, and depending on what tax bracket you fall under, you will pay a certain percentage of tax on the gain. Rates fluctuate based on your tax bracket as well as depending on whether it was a short term vs. a long term gain.
On the flip side, if you sold your cryptocurrency for less than you acquired it for, you can write off that capital loss to save money on your tax bill. All of this may sound familiar to you as it is exactly how taxes on stocks (a form of property) work.
For a complete deep-dive, you can read our blog post The 2019 Guide to Cryptocurrency Taxes.
The IRS is concerned that cryptocurrency is being used as a tool to dodge taxes. By adding this mandatory check box to the new 1040 Schedule 1, every US taxpayer will need to declare whether they have or haven’t used cryptocurrency in one way or another. The IRS is using this as a tool to increase cryptocurrency tax compliance and decrease money laundering/ tax dodging schemes.
This is not the end of the world. Anytime there is a new, high-growth asset class that emerges, societies and governments slowly figure out how it should blend in with the current world. This is simply the evolution of cryptocurrencies like bitcoin becoming more mainstream. For mass adoption to happen, the rules and regulations around cryptocurrency need to be clear. Clarity allows everyday people to gain a level of comfort and familiarity with a new asset like bitcoin.
To properly file and report your crypto transactions, you need to fill out IRS Form 8949.
You will list all cryptocurrency sells, trades, and dispositions onto Form 8949 (pictured below) along with the date you acquired the crypto, the date sold or traded, your proceeds (Fair Market Value), your cost basis, and your gain or loss. Once you have each trade listed, total them up at the bottom, and transfer this amount to your 1040 Schedule D. Include both of these forms with your yearly tax return.
For a detailed walkthrough of the reporting process, please review our article on reporting cryptocurrency on your taxes. You can also watch the brief video below to see an example of Form 8949 being filled out.
As always, it's a good idea to consult with a tax professional regarding your specific situation.
Perhaps you have forgotten, or just weren’t aware that you needed to be filing your crypto capital gains and losses on your tax return. It’s an honest mistake. If you are in this situation, the best approach is to amend your previous years returns. We walk through this process in our blog post here about amending crypto tax returns.
Calculating all of your cryptocurrency capital gains and losses and reporting them on 8949 can become a difficult task at times. Cryptocurrency exchanges aren’t much help when it comes to tax reporting (learn why here), and nothing is quoted in USD.
Cryptocurrency tax software like CryptoTrader.Tax is a solution built to automate the entire crypto tax reporting process for traders and cryptocurrency users. They also offer a tool specifically for tax professionals. Simply import your trades and transactions from your exchanges into the software, and it will generate your necessary tax documents like 8949 with the click of a button.
You can take your generated tax reports to your tax professional or simply upload them into tax filing software like TurboTax or TaxAct. You can learn more about how CryptoTrader.Tax works here.